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Judge in e-book trial: 'Things change' as Apple defense concludes

updated 01:39 am EDT, Thu June 20, 2013

by MacNN Staff

Testimony from Cue, Barnes & Noble exec change tone of trial

After having begun the case against Apple brought by the Department of Justice with a set of blistering opinions that essentially concluded the iPhone maker was guilty of the e-book price-fixing charge against it, Judge Denise Cote has been seen to change her position considerably over the course of the trial. On Thursday, as part of the winding down of the witness portion of the trial, she noted that she had "learned a lot" from the evidence after having felt "very prepared" ahead of the trial, and that the "issues have shifted" since the trial began.

Judge Cote's comments came at the end the case presentation, following a lengthy testimony appearance by Apple SVP of Internet Services and Software Eddy Cue -- who was not only the lead negotiator with the original six publishers ahead of the launch of the iPad and the iBookstore, but also acted during the trial as the interpreter of Steve Jobs' numerous emails and remarks entered into evidence by the government. By all accounts, Cue successfully refuted much of the spin the DOJ had put on Jobs' remarks, ably assisted by Apple attorneys who shredded some of the prosecution's use of Jobs' remarks as taken from unsent emails, drafts and other circumstances that could not have affected how the publishers handled their dealings with Amazon and each other over e-book pricing.

Cote seemed particularly swayed by Cue's explanation of a bit of Jobs email the government had relied heavily on, where in a draft the Apple co-founded had appeared to express a desire to move Amazon to the "agency model," a system of pricing where the publishers set prices and distributors (such as Apple or Amazon) get a flat percentage, usually 30 percent. The model, which the publishers eventually came to favor, raised prices on bestsellers for consumers in the short term once Apple entered the market, Cue admitted, but had numerous more beneficial effects -- a position supported by a raft of expert witnesses who also testified on Apple's behalf.

Publisher representatives have generally taken Apple's view on the model, saying that it was a necessary step to stop Amazon, which had been undercutting publisher's "wholesale" pricing on e-books and cannibalizing print sales, which at the time were the main source of income for publishers. The big content suppliers also worried that Amazon's preferred $10 price point for new e-book titles -- in some cases less than one-third the selling price of the hardcover print editions -- would devalue the worth of e-books in consumer minds, drive other points of sale (particularly brick-and-mortar bookstores) out of business, and prevent new competitors (both new publishers of books and new resellers of digital versions) from coming to market, since they could not afford to take a loss on books the way Amazon was prepared to. Over the course of the trial, and much to the government's chagrin, the trial has usually centered more on Amazon's monopoly abuse -- in 2010 it controlled about 90 percent of all e-book sales -- and predatory pricing than about any possible conspiracy on the part of the publishers, Apple, or all parties working in concert to "break" Amazon's wholesale pricing model.

Cue had testified last week that Jobs had initially been opposed to the idea of the iBookstore until Cue, having tested e-books on the then-unannounced iPad, persuaded the CEO of the value. Prior to Apple's approaching publishers, the big six providers had already been having discussions about Amazon's bullying tactics and had agreed to institute a practice called "windowing" -- keeping e-book editions of new titles off the market for weeks or months in order to protect print sales -- to fight Amazon's predatory pricing.

Apple, in persuading the publishers to use the "agency" model instead, had actually prevented the "windowing" practice from becoming widespread and encouraged growth and diversity in the e-book market, experts for Apple have testified. Amazon was eventually forced to adopt the "agency" model itself with little harm to its own business -- it is still the dominant player in the e-book industry, but loses less money on it now than it did when it was using predatory pricing -- and the practice levelled the playing field so that more competitors could join the market, including Barnes & Noble and Sony. Amazon had been using the wholesale model and its influence to grow and protect sales of its own Kindle e-reader.

The DOJ has maintained, however, that the initial rise in bestseller prices over Amazon's loss-leader pricing hurt consumers and represented a conspiracy against Amazon, often referring to Cue as the "ringmaster" after their initial attempts at involving Jobs had largely backfired. Though the government has maintained that consumers were harmed by the $2-$5 rise in e-book prices in the short term, Cue said that publishers had wanted e-books to be priced even higher and that Apple's caps had prevented that (which assumes that would have happened once Amazon was forced through the "windowing" practice to accede to publisher demands) while still giving publishers a "sustainable" model that allowed the pubisher, author and reseller to all make money while still being around half of the cost of printed bestseller titles.

Cue told the judge that Jobs was very surprised by the initial success of the iBookstore and the agency model, telling Cue that the company had "lit a powder keg" under complacent publishers and sellers. The DOJ entered the email into evidence, interpreting it as congratulations on breaking Amazon's grip on publishers, but Cue said the comment was more about Apple's ability to "cause ripples" in the entire e-book industry. The DOJ has repeatedly been accused by Apple's defense team of cherry-picking quotes, editing out context, relying on draft emails and other selective tactics -- and responded to a number of them by entering the full documents into evidence to counterpoint and on occasion embarrass the prosecution.

The tactic appears to be working. During a complicated portion of the defence case where Cue was asked to explain a series of email drafts Jobs didn't send out that discussed pricing and Amazon, the judge raised eyebrows by indicating that she was aware of the government's attempts to paint sections of later emails as further revisions when in fact they were copied and pasted from earlier drafts, or accidentally left in the last draft. She voiced an interpretation of the process that was favorable to Jobs' and Apple's intent, which Cue agreed with.

Later in the trial, a presentation made by the DOJ lawyers using a notebook and projector failed to make an impact because the slideshow was limited to one slide at a time, and the audio portion of an embedded movie failed to play. Apple's attorneys, skilled at using Keynote on their MacBooks, were able to make their rebuttal slideshow more flexible, showing slides side-by-side when asked or skipping around when requested by the judge, zooming in to highlight paragraphs and so forth. When she asked about the equipment the DOJ used, they indicated that their side was reliant on an HP device using Powerpoint, which brought smiles to some in the courtroom. By the end of Cue's testimony, nearly all of the evidence the DOJ had relied on from Steve Jobs was seen to be irrelevant.

The last witness for Apple on Wednesday was Theresa Horner, Barnes & Noble's vice president of digital content, and was described by Fortune's Philip Elmer-Dewitt as "everything Apple could have hoped for." Horner described how the e-book market looked in 2009 and 2010 from the perspective of a potential Amazon rival who had a strong retail presence but little hope of entering the e-book market with Amazon undercutting prices. Barnes & Noble would have to pay publishers under the wholesale model, meaning they would lose money on every e-book sold..

The Nook -- B&N's own e-reader -- launched just a couple of months prior to the iPad and sold better than the company had expected. As a result, it had to match Amazon's money-losing price on e-books, meaning it was losing around $3 per copy. Horner testified that weeks before Apple ever consulted with publishers, the CEO of Barnes & Noble had already been in discussions with them promoting two points nearly identical to Apple's later proposal: an "agency" pricing model, and its own version of the "most favored nation" contract clause the DOJ has hounded Apple for using. The clause simply says that publishers must give the reseller -- in this case Barnes & Noble -- the same rate as the lowest rate it gives anyone else.

Her testimony destroyed a key pillar of the government's entire case -- that Apple had used the "most favored nation" clause to effectively force the agency model on publishers who would in turn force Amazon to use it in an effort to break Amazon's monopoly. She added in her testimony that Apple's plans were never brought up in her discussions with publishers. Nobody -- including Apple -- forced Barnes & Noble to use the agency model, she said. It was the only way B&N could go from losing $3 on every e-book to making $3 on every e-book, she told the court.

When asked by Apple attorneys what would have happened to Barnes & Noble if it hadn't switched away from the wholesale model, Horner said the company would have continued to lose money on e-books, and that it was a model the company could not sustain. The government attempted to show that a B&N internal memo that noted that e-books were "the future" proved that the model was sustainable, but Horner said she didn't know the intent of the memo. Judge Cote, unusually, had no questions for Horner after she finished her examination.

Other witnesses were heard from on Wednesday, including US iBookstore head Rob McDonald, who was asked to demonstrate the "page curling" feature on iBooks, Apple's particular implementation of which was credited to Steve Jobs (and subsequently imitated by Amazon in their Kindle app for iPad). In an extraordinary moment, Judge Cote stopped McDonald, saying "I have an iPad. I love my iPad. I have seen this feature."

After the defense had rested its case and she declared the case closed, Judge Cote began typical end-of-case remarks thanking both sides for their courtesy and professionalism in the case, and then elaborated that she had felt herself very "well-prepared" by reading through all the pre-trial material, but said she "learned a lot" from the presentation and that both sides had "helped me understand so much more through the evidence." She said that she was looking forward to the summations scheduled for Thursday, and that "it seems to me the issues have somewhat shifted during the course of the trial."

"Things change," Cote said. "People have to stay nimble. I'm looking forward to understanding where we are now."

Following the summaries, the judge is not expected to rule directly from the bench, and a final decision may not come for weeks or months. Her last remarks, however, along with some pointed questioning during the trial, have given observers the strong impression that whatever skepticism towards Apple she may have had or conclusions she may have reached prior to the start of the trial, they've been re-examined over the course of the case.

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9 Comments

This is a very interesting read. Of all the things you could go after Apple for, this case always seemed utterly foolish to me. I'm glad that Apple seem to have been able to adequately convey this foolishness to the judge.

Seriously, she ought to resign. Microsoft's antitrust conviction was overturned for comments on their conduct DURING that trial which were less biased than she was making left and right BEFORE the trial.

@kerryb - What I think she meant by "well prepared" was that she was going into the trial with all of the preliminary evidence expecting to hear Apple refute that they had any hand in this. In the end, what I think she learned, was that Apple wasn't trying to run a monopoly, but, rather, trying to help other publishers, e-book stores and itself to level the playing field. I don't think that she had come into the courtroom with a pre-determined idea of how she was going to rule the case.

A least one benefit will come from this trial. We now know that Steve Jobs played a major role in bringing some sense to the major publishers. Windowing print versus ebook sales was a bad idea. It would have hurt consumers, authors and publishers. But the time that ebook edition came out, those committed to ebook-only reading would have forgotten the original advertising push.

Agency pricing, I'm starting to believe, is as natural for the release of digital content as the wholesale/retail models was for print books, CDs and DVDs. The two go well together, as does a subscription model (i.e. Netflix) for those who consume a lot of content. A lot changes when the cost of manufacture and storage is essentially zero, and the cost of distribution is low. That frees up a larger share of the retail price for creator (authors, editors and publishers), while still offering a reasonable markup for those who host, distribute, and take care of the financials. And the combination of the two means a lower retail price while still keeping all parties in the dispute economically viable.

In this fuss, the DOJ isn't just fighting Apple. They're fighting the future. For digital content, agency and subscriptions are the future.

And besides, I'm so delighted by how my most recent book looks on iPads, I've altered the formatting of my next book, so the print edition will more closely resemble that of the iPad edition. Digital is now driving print rather than vice-versa.

Just a quick note to The Vicar: Judge Cote did not offer her preliminary views on the case before the start of the trial proper unsolicited. She was responding to a request from the DOJ that was stipulated to by Apple on whether she thought the case should proceed. In doing that, she had to make a call on whether each side had a case, and she said at the time she thought the DOJ would be able to prove its hypothesis. So the call for her to resign is misplaced, I think. The move was unusual but, as far as I can tell, not improper.

Thank you, bonaccij and chas_m. There have been few intelligent posts about the judge and her pre-trial statements. You're exactly right that there is nothing improper about it. She also said at the time that it was a "tentative" opinion, and she hadn't even read all the pre-trial evidence. She also said that the case will be decided on the evidence presented in court, not in pre-trial pleadings.

Apparently, she had been involved with the government's settlement with the publishers, so she was well-versed with the publishers' part in all this, but evidence from Apple's side was new to her.

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